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ILFC Further Refines Its Parts Pipeline

International Lease Finance Corp.'s (ILFC) purchase of AeroTurbine two years ago signaled a new sophistication in managing its assets. Lufthansa Technik noticed and is understood to be purchasing a 15% stake in AeroTurbine. Sources involved in the deal say the partnership will be announced this week.

The agreement, pending regulatory approval and typical closing requirements, includes AeroTurbine supplying a certain amount of material to Lufthansa Technik, Lufthansa Technik consigning surplus material to AeroTurbine, and AeroTurbine purchasing maintenance services from the German-based MRO, according to industry sources.

Expect the companies to take advantage of these reciprocal business opportunities immediately after closing.

The catalyst for ILFC purchasing AeroTurbine is really the same one that impelled Lufthansa Technik to invest in the company—the pipeline of about 250 aircraft that the leasing company has identified for retirement—and the resulting stream of material.

This pipeline helps to render the unpredictable surplus market predictable. Instead of procuring parts in the open market or on consignment, this flow of material provides AeroTurbine with the ability to chart which aircraft and engine serial numbers will be available—and when.

And because ILFC's fleet will continue to evolve, this pipeline will not shut down. Material will consistently flow into AeroTurbine's system.

This allows companies to buy used, serviceable parts, which often are a fraction of the price of new ones, in a very predictive way that satisfies operational requirements.

Lufthansa Technik's investment bolsters its fill rates of that serviceable material for its group of companies, and underscores its interest in developing a strategic alignment with ILFC, which is one of the largest leasing companies in the world, boasting more than 1,000 aircraft in its portfolio.

Prior to this agreement, Lufthansa Technik was a tactical customer of AeroTurbine products and services, but it did not have a contractual arrangement.

In a statement that will be released this week, ILFC CEO Henri Courpron says, “This new partnership is a first step in developing a broader relationship between Lufthansa Technik and ILFC” and “will further advance ILFC's strategy to provide complete aircraft life-cycle solutions to its customers.”

Five years ago, ILFC was emerging from the 2008 financial crisis with a veritable financing and leasing services business—but a fleet that needed renewal to keep up with airlines' demands for more efficient aircraft, given the spiking costs of fuel. It regained access to substantial liquidity and started placing sizable aircraft orders.

As it planned for a younger fleet and identified the 250 aircraft for retirement, ILFC's executives came to the realization that to extract more value from the remaining life of the assets and be smarter about life-cycle management, they needed to implement a cradle-to-grave approach.

Enter the AeroTurbine acquisition from AerCap Holdings for $228 million in August 2011. This launched ILFC, which is Airbus's largest customer and Boeing's biggest leasing company customer, into the part-out business and resultant inventory solutions, supply-chain and engine-leasing businesses.

The link-up has allowed ILFC and AeroTurbine to make joint sales calls for putting in and taking out aircraft—from initial spares provisioning for new aircraft to exit strategies for aircraft and spare inventories that operators no longer require.

And now add Lufthansa Technik, one of the largest, technologically savvy maintenance, repair and overhaul operations in the world, to its list of partners.

Courpron's vision of complete aircraft life-cycle solutions is becoming more clear—and Lufthansa Technik's investment is a sign that the strategy laid out two years ago with AeroTurbine is working.

If the forthcoming partnership meets certain performance targets, Lufthansa Technik will have the option to increase its investment to 19.9%.

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